51job, Inc.
Q3 2016 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

Good morning, ladies and gentlemen, thank you for holding. Welcome to the 51job, Incorporated's Third Quarter 2016 Conference Call. [Operator Instructions] I will now hand the conference over to Ms. Linda Chien, Vice President and Head of Investor Relations. Thank you, madam, please go ahead.

[Linda Chien:]

Thank you, operator, and thank you all for attending this teleconference to discuss unaudited financial results for the third quarter ended September 30, 2016. With me for today’s call are Rick Yan, President and Chief Executive Officer, and Kathleen Chien, Chief Operating Officer and Acting Chief Financial Officer. A press release containing third quarter 2016 results was issued earlier today and a copy may be obtained through our website at ir.51job.com. Before we begin, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provision of the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon management’s expectations at the time of the statement and involve inherent risks and uncertainties that may cause actual results to differ materially. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 20-F. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements except as required under applicable law. Also I would like to remind you that during the course of this call we will discuss non-GAAP measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables appended to the press release. This conference call is being recorded and broadcasted on the internet and a replay will be available through our website at ir.51job.com. Now I'll turn the call over to Rick.

[Rick Yan:]

Thank you, Linda, and welcome to today's call. I will begin with an overview of the third quarter, followed by Kathleen with a detailed discussion of our financial results and our guidance for the fourth quarter of 2016. Finally, we'll open the call to your questions. We are pleased to report solid third quarter performance with improved growth in the online business, which helped to offset the impact of VAT implementation on the other HR services area. Total revenues of RMB595 million were at the top of our guidance range and non-GAAP EPS was RMB2.89, which exceeded our forecast. Our online revenues increased 70% in the third quarter, which for the sixth consecutive quarter was achieved through both increases in customer count and average revenue per customer. The work we have been doing to realign our sales resources and raise productivity is yielding tangible results, and we believe we are now on a more balanced and efficient path to sustainable growth. We saw a faster pace of customer additions in the third quarter and the number of active paying unique employers increased to 334,000 companies. Online ARPU maintained its positive momentum due to our successful effort to upsell employers to greatest multiple or high-priced offerings. The consistent progress we have made in improving ARPU also strengthens our confidence in the compelling value proposition we bring to employers, with a wide range of online services and multiple recruitment platforms. In the other HR services area, revenues reflected a full quarter effect of the VAT transition and growth was 8% in the third quarter, led by increased usage of our BPO services. While the VAT impact on revenue recognition and year-over-year comparisons will linger through to the first half of next year, we have completed operational adjustments related to VAT implementation and our BPO business is moving forward normally. Employer interest remains robust and the geographical coverage of our BPO business now extends to more than 200 cities in China. Leveraging our technology assets and large customer service infrastructure, we provide a seamless solution to alleviate the growing HR administrative burden and compliance risk facing companies. The sales force will continue to focus on improving cross-promotion of our value-added HR services, especially to our larger-sized corporate customers. Turning now to our current market assessment. Despite the ongoing overhang of concerns about the Chinese economy, we have continued to observe positive and steady footing [ph] for white collar recruitment sentiment throughout this year. While it is premature to provide an outlook for 2017 at this time, our conversations with employers in recent months do not signal any meaningful changes to the recruitment plans and expectations. Per usual, the most important indicators of market demand next year will come from the hiring activity and data points in the post-Chinese New Year recruitment peak season, which will start in early February 2017. We look forward to providing you a market update on our next call. As we near the conclusion of our 18th year in operation and 12th year as a publicly listed company, the road ahead remains long and exciting. We are very confident in our strategic blueprint for the Company's next stage of growth and development. Our past and future success is never possible without invaluable contribution of every member of the 51job family. We are now over 7,000 strong, and I thank them for their hard work and dedication. Together our transformation into a more comprehensive, multi-faceted and full end-to-end HR services provider is well underway. I would now turn the call over to Kathleen.

[Kathleen Chien:]

Thank you, Rick. In my following presentation, please be aware that all financial numbers are in the reporting currency of the Chinese renminbi unless otherwise stated. Also, please note that all growth rates are on a year-over-year basis as compared to the corresponding period in 2015, unless otherwise indicated. Our total revenues for the third quarter of 2016 were RMB595 million, representing a 13% increase. Online revenues for the third quarter grew 17% to RMB398 million. We continue to realize top-line growth through a combination of customer count increases and higher revenue per customer. In the third quarter, the number of unique employers increased by 13% as we net added over 38,000 companies compared to the year-ago quarter. Online revenues per employer maintained the upward trajectory and increased 3% in the third quarter. We stay focused on building a high-quality revenue pipeline with healthy growth contribution from both new customer additions and increased ARPU. The revenues for other HR services were affected by the implementation of VAT and increased 8% to RMB197 million in the third quarter, driven mainly by the growth of our BPO services. Beginning May 1, other HR services ceased paying business tax and became subject to VAT plus other relevant surcharges. The recognition of revenues is now on a net of tax basis and therefore reduces the amount of revenues we report. While our cross-selling initiatives to promote other HR services has not been affected by VAT adoption, our progress and results in the near term will be partly obscured in the year-over-year revenue and growth [ph] comparisons until mid-2017 when it anniversarizes. Gross profit grew 15% to RMB421 million and gross margin was 71.5%. Included in cost of services in the third quarter were share-based compensation expense of RMB3.4 million. Our sales and marketing expenses increased 24% to RMB205 million in the third quarter and the increase was primarily due to higher employee compensation expenses, headcount additions, as well as greater advertising expenditures. Included in sales and marketing expenses in the third quarter was share-based compensation expense of RMB2.9 million. Without share-based compensation, sales and marketing expenses were 34% of net revenues, compared with 32% in the year-ago quarter. The impact of VAT and the subsequent reduction in reported revenues was a primary factor in the higher percentage of sales and marketing expense to revenues in the third quarter and will continue to affect this ratio into the first half of next year. Our G&A expenses increased 7% to RMB70 million in the third quarter. And the increase is mainly due to higher employee compensation and office expenses. Share-based compensation expense included in G&A was RMB15 million. Operating income increased 9% to RMB147 million and operating margin was 24.9%, compared with 26.3% in the third quarter of 2015. Excluding share-based compensation expense, operating margin would be 28.5% compared with 30.2% in the year-ago quarter. Now due to the change in the value of the RMB against the U.S. dollar and the foreign currency impact on our U.S. dollar cash deposits and U.S. dollar denominated convertible notes, we recognized a foreign exchange loss of RMB18,000 in the third quarter. Under mark-to-market accounting, we also recognized a loss of RMB43 million in the third quarter associated with the change in the fair value of the convertible notes. Other income in the third quarter included RMB23 million in local government financial subsidies versus RMB16 million in the year-ago quarter. Net income attributable to 51job for the third quarter was RMB108 million and the fully diluted EPS was RMB1.84 or $0.28 per share. Excluding share-based compensation expense, loss from foreign currency translation, the change in the fair value of the notes, as well as the related tax impact of these items, non-GAAP adjusted income attributable to 51job was RMB172 million in the third quarter. Under the if-converted method, non-GAAP adjusted fully diluted EPS was RMB2.89 or $0.43 per share. Turning to our balance sheet, we ended the third quarter with a strong position of RMB5.6 billion in cash and short-term certificate of deposits, equivalent to approximately $845 million. The use of cash resources continued to be prioritized on pursuing investment and M&A opportunities. As we mentioned in our call in August, we are in advanced discussions with some target companies and we stay on course to complete these transactions before yearend. Turning now to our guidance. Based on current market conditions and factoring in VAT's impact on other HR services, our total revenues target for the fourth quarter of 2016 is in the estimated range of RMB680 million to RMB700 million. For the non-GAAP fully diluted EPS target, our estimated range is between RMB3.05 and RMB3.25 per share under the if-converted method. Please note that this non-GAAP EPS range does not include share-based compensation expense, the impact of foreign currency translation, and any change in the fair value of the convertible notes, nor the related tax effect of these items. Total share-based compensation expense is expected to be between RMB22 million and RMB23 million for the fourth quarter of 2016. This guidance reflects our current forecast, which is subject to change. This concludes our presentation. We will be happy to take your questions at this time. Operator?

[Operator:]

Yes?

[Kathleen Chien:]

We're ready to take questions at this time.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Wendy Huang. Please state your company name followed by your question. Thank you.

[Wendy Huang:]

Thank you. Congratulations on the strong results, especially this is a good set of numbers [inaudible] I think. So I have two questions. First is your number of customers as well as ARPU percentage [ph] both expanded actually quarter over quarter and year on year. Was that due to some cost initiatives that you did in the quarter that are [inaudible]? How should we actually expect it will trend going forward? And also what's implied in your Q4 guidance? Second question is about your margin. With margin decreased from 72% a year ago to 68% now, so, how should we expect the trend going forward and [inaudible]? Thank you.

[Kathleen Chien:]

Thank you, Wendy, for the two questions. Let me try to answer both in sequence. In terms of the number of customer and ARPU going up at the same time, I mean, as you can see, in the last couple of quarters, I think we've been able to achieve that sort of double lift in each of the quarters. In third quarter, I think our customer count growth was a little bit stronger than what we had been on in terms of the trajectory, first half of the year, but I think part of that is just I think the discipline that we have had in bringing in new sales people, for making sure that they're being well-trained and then facing customers and making the strong acquisition. I think that's finally taking foot [ph] again. So I think we're pleased with that. In terms of just looking at Q4 and how that may change, I would expect that Q4 we would still expect to have year-over-year growth both in the employee growth as well as pricing, although I would expect that the mix between the two should be more similar to Q3 rather than the first half of the year, because I think in the fourth quarter, typically we've actually had higher ARPU in general anyways. So I think we probably should not expect a large pricing growth in the fourth quarter, rather than I think more the growth will be coming from the customer count in the fourth quarter. So that would be how the breakdown will look. The second question in terms of gross margins, I think if you look at year over year, we're down slightly. We're down about 30 basis points actually versus a year ago quarter. But in terms of Q-on-Q, in terms of how did versus last quarter, we actually edged up, up by about 30 basis points. So I think we're just going through a little bit of realignment. We've been actually pretty aggressive in terms of tech and service side people, just as we build out multiple store front in terms of our product portfolio, so that's actually weighed a little bit on our margins in the short term. But I think we still feel confident that we should be able to hold our margins at similar levels and that it will not be something that we expect to have significant decline going forward. I hope that answers your question.

[Wendy Huang:]

Thank you. Sure. On the gross margin, one follow-up, it was previously, I think you mentioned the different gross margin profile between the other HR services versus the online services. So with the mix change kind of continuing, should we expect gross margin to change as well?

[Kathleen Chien:]

I don't actually believe that we should really try to say that the gross margin is driven by the product mix, because it's really not for the most part. I think for all intents and purposes, as you can see, our other HR services obviously has been growing steadily over time, but I don't think that's really the driver of our gross margins overall. Overall, I think our gross margin really trend more closely to our overall growth, if you will. If we actually achieve what we expect on the top line or exceed it, I think our gross margins tend to move up somewhat. And it's not really that related to the product mix at this point in time. I think we have a service infrastructure that we built into certain revenue levels and, if we actually can meet or exceed it, then we'll get more leverage in general, and it's not necessarily product specific.

[Wendy Huang:]

Thanks, Kathleen.

[Kathleen Chien:]

Thank you.

[Operator:]

The next question comes from the line of Thomas Chong. Please state your company name followed by your question. Thank you.

[Thomas Chong:]

Hi. This is Thomas Chong calling from Bank of China International. Thanks management for taking my question. I have two questions. Can management talk about the trend in terms of the hiring demand for your key industry categories? And my second question is about the increase in the number of customers. Is there any particular industry sector that you see you have more of the customers increase? And maybe a follow-up is about the headcount. Can you provide me about your headcount for the third quarter versus the second quarter? Thanks.

[Kathleen Chien:]

Hi, Thomas. Thank you for your questions. In terms of the hiring trend, to be honest, I don't -- we haven't really observed any significant changes, I would say, in the last quarter too much, because I think the overall sentiment in the market has been fairly kind of the same. I think the only thing I guess I could probably point to is that I think there has been a lot of noise on some of the P2P platforms which are not performing well given new regulations and some of the impact of that. But I mean, to be honest, overall it's not really moved the needle too much. So I would say that we have not observed any significant difference in terms of the trend in the last quarter. In terms of then the number of customers, I think you alluded to about industry breakdown. We are very diverse and broad-based in terms of what we cover, so we do not actually have significant concentration of customers by industry. So, again, I would not remark on any particular industry having a strong influence over our performance because I think we need the overall economy, the overall sentiment to be robust or at least stable, for us to continue to grow, and I think that's what we're seeing, that is actually a stable environment. It hasn't been driven by a particular industry. Finally, the question related to headcount. We continue to actually grow our headcount a little bit, so our headcount is up about 300 people in the last quarter. Year over year we are up about 10% in terms of overall headcount. So that's where we stand at this point.

[Thomas Chong:]

Thanks for the detailed answer. I will get back to the queue.

[Kathleen Chien:]

Thank you.

[Operator:]

[Operator Instructions] Mr. Yan, there are no further questions at this time. Please continue with any final comments. Thank you.

[Rick Yan:]

Thank you for joining us today. We look forward to speaking with you next quarter and garner [ph] your continued support of 51job. Have a good day. Bye-bye.

[Operator:]

Ladies and gentlemen, this concludes the 51job, Incorporated's third quarter 2016 conference call. Thank you for participating. You may now disconnect.